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Ian Lind • Online daily from Kaaawa, Hawaii

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Sticky property tax issues with some Waikiki transient vacation rentals

February 8th, 2014 · 6 Comments · Business, Consumer issues, Politics

A reader called my attention to one of the anomalies in Honolulu’s current real property tax structure.

Did you notice the list of “nonconforming use certificates” for transient vacation rentals includes numerous units in several Waikiki condominiums, including the Royal Kuhio, 444 Nahua, Waikiki Banyan, and Waikiki Sunset.

The latter two condominiums operate as hotels managed by Aston.

Waikiki

The interesting thing is that although these buildings operate as hotels, their individual apartments pay property tax at the rate reserved for residences rather than the higher rate that applies to hotels.

The reader who called this to my attention noted:

Aston operates rental programs in each. If you look in the HTA
Visitor Plant Inventory you’ll see that the Sunset has over 300 units
in Aston’s program. It’s a very successful and lucrative operation
for Aston.

The units are taxed at the residential rate of $3.50/$1,000 rather
than the resort rate of $12.40/$1,000. It seems to me the City is
leaving big money on the table here, as there are a number of condo
hotels mauka of Kuhio Ave.

The Waikiki Sunset’s most recent annual report indicated just 4.14 percent of its 435 units are owner occupied. Most of the rest are likely in that rental pool.

A condominium unit used for transient vacation rentals and appraised for tax purposes at $250,000, would have a tax bill of $875 annually if taxed at residential rates, while the same unit at hotel rates would pay $3,100 in real property tax. The city could certainly use those additional tax revenues.

Mayor Kirk Caldwell introduced a bill last year that would have put all transient vacation and bed-and-breakfast units into the “hotel and resort” category, taxing them at the higher “hotel” rate (see Bill 37-2013).

It went nowhere.

According to a newsletter put out by Council Chair Ernie Martin after that debate:

There were cries of protest from both sides of the TVU issue. Advocates for increasing the number of permitted TVUs contended that it was unfair to increase the proper tax on legal vacation rentals when the owners of unpermitted and thus illegal units would simply evade both a property tax increase and the general excise tax on rental revenue. Opponents of more TVU’s consider the tax proposal secondary to the real issue of the lack of enforcement of the rules and the failure to force compliance with laws already on the books.

I don’t understand the history of these condoles from the 1970s, and how they managed to operate as hotels without being taxes as hotels. There must be some interesting politics there.

In the meantime, perhaps the approach of Bill 37 could be targeted at the buildings that are operated as hotels relying on those “nonconforming use certificates.”

It would also be interesting to dig deeper into the economics of those condoles. How much of the revenue flows to individual owners, and how much is raked off by the hotel management company? Who controls the condominium boards, and how do those boards deal with the power of the hotel company? Is turnover high or low? Lots of questions that might yield interesting answers.

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6 Comments so far ↓

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  • ForPeople

    Aloha Ian.
    Have you looked into these issues relative to the existing “Ocean Villas” at Turtle Bay? It seems like a large number of these Ocean Villas (if not all of them) may be utilized as vacation rentals. What rate are these taxed at? This is relevant to the current discussion regarding the Turtle Bay expansion as well because hundreds of new units that would be similar to the Ocean Villas are being proposed. Surely part of the cost/benefit equation of the expansion hinge on what sort of property taxes the County will be collecting on resort units that are likely to utilized as vacation rentals rather than as residences…

  • Natalie

    This is yet another example of why the entire RPT system needs to be reviewed. If you look at the testimony that was given for Bill 37, http://www4.honolulu.gov/docushare/dsweb/Get/Document-139883/BILL037%2813%29.htm, you’ll understand why it didn’t go anywhere.

  • maunawilimac

    Because there is no enforcement of A for compliance with B, therefore it is unfair to tax C in regard to D? With this kind of logic in play, Alice-in-the-looking-glass politics will surely swamp our ship of city and county. Absurd to the max! (maybe we should go back to having the State handling property tax administration with the County Councils setting the rates.)

  • MakikiBarb

    This issue is something to keep in mind when thinking about the luxury high-rise condos going up in Kakaako. Will they get exemptions as well when their absentee owners turn them over to a hotel operation, as is very likely to happen with a great many of these uni?.

  • zzzzzz

    MakikiBarb, this was discussed a bit in a recent post about this issue. My understanding is that no new “nonconforming use certificates” are being issued, which means that the new condos coming up cannot be legally used as short-term rentals.

    Perhaps some sort of education program is in order to ensure buyers of those new condos understande this.

  • CrayolaKoala

    This is an issue that the AiKea Movement has been raising awareness on for a while now (http://www.aikeahawaii.org/tell-your-city-councilmember-that-you-want-to-keep-good-jobs-in-hawaii and http://www.aikeahawaii.org/wp-content/uploads/Whitepaper-4-30-2013.pdf).

    3 of the top 5 hotel owners by room count in Hawai’i are private equity firms. There’s a growing trend of converting hotel rooms into condos & timeshares because it’s more lucrative for these developers–and our community pays the price. The tax issue is just one facet of this. As you point out, we lose out on tax revenue since they’re taxed as residential units and not hotels. We also lose jobs when hotels are converted, which costs us more tax revenue.

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